Unlocking value in large-deal healthcare M&A: How to achieve transformation during integration

Healthcare as an industry is evolving at an accelerating pace with organizations placing big, bold bets on vertical integration, digital enablement, and the development and scaling of healthcare ecosystems. Merger and acquisition (M&A) activity within the industry is increasing, even as we continue to navigate the COVID-19 pandemic. Reflecting what we have learned since March 2020, organizations are refreshing their long-term plans and have greater clarity on the strategies, assets, and capabilities needed to succeed in the years to come.1

In our multi-decade research on types of M&A, we consistently find that across industries, including healthcare, a programmatic M&A approach is most likely to deliver the highest value, on average, with the least risk compared to other approaches. However, large deals (where the partner is more than 30 percent of the acquirer’s size) also have the potential to unlock substantial value but with greater risk. In our analysis of deals in the top 2,000 global companies by market capitalization over the past decade, large healthcare deals were equally likely to generate big wins as big losses. These deals are often difficult to execute and benefit from transformative value capture to deliver on their full potential. As we shared in “Healthcare’s evolving chessboard: M&A capabilities to accelerate long-term strategy,” value creation two years post-close strongly correlates with value creation five years post-close, demonstrating the importance of disciplined, robust value capture early in the integration process for large deals.

In this article, we focus on “transformative integrations”—an approach that can help healthcare organizations beat the odds when it comes to value creation in large deals. This approach combines the traditional elements of integration with principles from transformation (Exhibit 1). Importantly, this approach also brings unique challenges and may not be well-suited to all transactions. Yet when executed well, transformative integrations can empower organizations to achieve bigger and broader impact more quickly and sustain these changes to achieve greater long-term value creation, benefiting these organizations and the communities they serve.

Transformative integrations can build on the foundational elements of combinatorial integrations.

In healthcare, integration leaders are increasingly considering and are beginning to adopt transformative approaches, due to the increasing prevalence of large deals and the rising recognition of the needs prompted by evolving industry dynamics. We define good candidates for transformative integrations as those with both a high need to transform and high willingness to execute across the leadership team (Exhibit 2). In our experience, the effort should be among the CEO’s top three priorities throughout its duration, often with disproportionate mindshare and dedicated time. The CEO needs to make decisions that stick, especially for critical operating model choices (including organizational structure, business processes, and culture) that are critical for both the foundation of the effort and maintaining momentum throughout implementation.

Transformative integrations are best suited for mergers with both a high need and the willingness to transform.

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In addition to the CEO, other executive leaders must devote significant energy to the effort. For example, when CFOs reported being “very involved” in merger integrations, companies were much more likely to capture cost and revenue synergies that were at or above plan. Organizations that can execute effective integration while also capturing value from transformation are likely derisking their large deal, more rapidly achieving their integration and transformation strategic objectives, and better positioning themselves for long-term value creation.

While it is true that transformative integrations introduce additional complexities and scope, they also present the opportunity to achieve commensurate benefits. Combinatorial integrations are often inaccurately perceived as lower risk since functions and ways of working generally undergo fewer changes given a desire to stabilize the acquired organization. Yet choosing not to transform from the outset can result in significant pitfalls—in the form of missed opportunities to realize strategic intent, prolonged organizational and culture disruption, and failing to capture full potential value, all of which can be mitigated by swift decision making at the outset of an integration.

A transformative integration is a “one fell swoop” approach, not a “one battle at a time” approach, and requires high tolerance for fast-paced change that can also shorten the overall duration of disruption. This approach across two organizations may catalyze more “quick wins” and momentum for value capture than transformation of a single organization (for example, alignment on the case for consolidating vendors may be more compelling). And the case for “why” the organization needs to transform can be easier to articulate and build support around in the context of an integration. When done well, the transformative vision of the new organization bolsters the case for integration and building “better” rather than “best of” functions as a result.

For healthcare organizations, transformative integrations can enhance core performance and build new capabilities. For example, a payer could acquire another payer with distinctive capabilities in Medicare Advantage, such as helping members proactively manage chronic conditions. As part of a transformative integration, the acquiring payer could apply these best-in-class capabilities to its own Medicare Advantage members as well as its other lines of business, thereby improving access, affordability, quality, and experience for all members—as well as the payer’s overall performance. Similarly, two merging health systems could reduce supply expenses by not only consolidating to one group purchasing organization, but also by fostering strong clinical engagement to promote consolidation across physician preference items based on health outcomes. Again, this would result in better quality of care for patients as well as decreased costs for the combined health system.

We see seven ingredients for organizations to incorporate into their transformative integration approach to create and capture value.

1. Make end-state decisions early and top-down

Complex integrations, especially when combined with transforming the business, require leadership teams to make critical end-state decisions well ahead of close, including deciding on leadership and board structure, aligning on the new operating model, setting culture priorities, and establishing the integration and transformation architecture. Top-down decision making also is critical for value capture: organizations that set ambitious targets for both growth and cost synergies set the bar for the rest of the transformation. The initial scope must be sufficiently bold and broad across functions. The shift to a transformation mindset will take time and may be more difficult for organizations that use consensus-driven decision making. Understanding the legacy governance structures and processes of both organizations can elucidate the changes needed to lay the groundwork for transformation approach.

2. Protect patient care and member experience while transforming

Throughout planning and implementation, minimizing disruption to consumers and customers must be a major focus. This is especially critical for organizations providing direct patient care and/or member experience. Functional leaders need to be able to dynamically balance business and transformative integration demands. Throughout the process, changes impacting frontline staff must be communicated clearly and rolled out thoughtfully to ease transitions, especially given increased levels of staff burnout resulting from the COVID-19 pandemic. Creating a positive experience for staff will likely reduce turnover, thereby minimizing disruption to consumers and safeguarding patient and member satisfaction and retention.

3. Don’t make Day 1 bigger than it needs to be

Part of protecting business continuity is rigorously narrowing what tasks are critical for Day 1 (for example, communicating changes to stakeholders, defining the new organizational structure, fulfilling legal entity requirements) and what can be completed over the longer term (for example, changing signage on buildings, harmonizing service lines, implementing strategic initiatives). Most employees will not be directly impacted on Day 1 and can instead focus on the transformation elements of the effort and delivering patient care or member experience.

Healthcare’s evolving chessboard: M&A capabilities to accelerate long-term strategy

Healthcare’s evolving chessboard: M&A capabilities to accelerate long-term strategy

4. Focus on cultural diligence and change management

Culture is a critical element of both integration and transformation success. In many cases, a merger can substantially change the culture for one or both legacy organizations, creating uncertainty and apprehension for employees. Failing to anticipate cultural challenges can lead to losing critical talent and never realizing value capture or operating model goals. To succeed in changing and sustaining the operating model, organizations must align on a shared culture and ways of working and share a clear and compelling case for change that leaders consistently role model (Exhibit 3). Messaging should be both aligned to the deal rationale and tailored to different stakeholders. Organizations are well-served by using a change story to communicate the “why,” “what,” and “how” behind the transformative integration that both inspires and challenges leaders to execute collectively on the vision for the new organization. Defining the messages of the change story early builds conviction and momentum for the rest of the effort.

Change management actions can embed cultural shifts and hardwire operating model changes.

5. Establish a robust integration and transformation infrastructure

An Integration and Transformation Management Office (ITMO) (Exhibit 4) is accountable for the success of the program, and therefore must have clear authority to make critical in-scope decisions, set the pace of the integration, and challenge functional teams to achieve impact as well as support and influence C-level and business unit (BU) leaders to make timely decisions (see Sidebar 1). The ITMO combines a Transformation Office (TO) with the traditional merger-focused Integration Management Office (IMO) (for example, comprehensive organization design, master planning, and the end-state operating model). The ITMO with appropriate cross-functional representation can lead both the integration and transformation, preserving continuity across the effort, and ideally leads any other major ongoing initiatives with interdependencies as well. In addition to staffing the ITMO, a transformative integration will require heavier resourcing from across the organization to implement initiatives, as well as additional senior leadership involvement to resolve bottlenecks, mobilize resources, and inspire and activate the broader organization.

The core integration and transformation infrastructure will support the successful delivery of the program.

6. Get the baseline right

Both integrations and transformations require starting from a comparable set of granular baselines—costs, revenue, activities and processes, and people. Understanding how and where activities get done is needed to create the end-state operating model and manage interdependencies across functions. An in-depth financial baseline is critical to not only combine but also transform, since it elucidates the full magnitude of the value capture potential. The baselines must be validated with functional teams to ensure numbers are accurate and recognizable before assigning synergy targets to teams; this feedback process builds trust in the numbers and buy-in needed for teams to reach synergy targets.

7. Deploy detailed and creative bottom-up planning

Value capture teams should leverage the granular baselines above as the fact base to inform individual initiatives, and these initiatives need to collectively build toward the targeted end-state for the organization. Bottom-up planning should be guided directly by early top team decisions, including the strategic goals of the transformative integration, end-state operating model, and CEO-1 organizational structure. Value capture teams need to include critical roles across the organization, for example, including clinicians in co-creating supply chain initiatives. Teams aim to draft bold and ambitious initiatives—a typical combinatorial integration may overly focus on getting to stabilization in the merger, while a transformative integration prioritizes reimagining and redesigning functions and processes. Together, the initiatives comprise a “bankable” implementation plan against which progress is tracked, including detailed milestones, clear aluation principles, and defined owners. Transformative integrations require substantial resources, commitment, and effort and should not be undertaken lightly (see Sidebar 2). Yet healthcare organizations approaching large mergers can “beat the odds” to achieve rapid, dramatic, and sustainable impact if they can successfully transform while integrating.

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